Entity Tax Showdown presents
In this corner, the limited liability company
LLCIn that corner, the S corporation election
S CORPSame income. Two routes. No winner declared.
The main event
How S corps and LLCs are taxed on the same income
An LLC is a legal form. An S corp is a way of being taxed. Put the same profit through each and the owner’s pay, self-employment tax and running costs all come out differently, so the question worth asking is what is left at the end.
Round one
The tax questions on the card
Where the two routes part company, asked of the same profit.
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Co-main event
Self-employment tax
Which part of the profit does it reach on each side, and how does that change the comparison?
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Co-main event
Owner salary
What does a reasonable salary mean for an owner, and why does the whole S corp case lean on it?
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On the undercard
Pass-through income
How does business income reach the owner’s personal return on each route?
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On the undercard
Running costs
What do payroll, bookkeeping and tax preparation add, and on which side?
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On the undercard
State treatment
Does the owner’s state look at the two routes the same way?
Round two
The tale of the tape
What stands in each corner when an LLC is taxed the default way and when a business is taxed as an S corp.
LLC
S corp
How the owner takes money out
Draws against profit
A salary, then distributions
Tax on the owner’s work
Self-employment tax
Payroll tax on the salary
Where the income lands
The owner’s return
The owner’s return
What it takes to run
Bookkeeping
Bookkeeping and payroll
Round three
The running order for working it out
How to estimate the comparison for one business, in the order the pieces depend on each other.
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Start from one profit figure
Use the same income on both sides. Change it between columns and the comparison stops meaning anything.
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Set the owner’s pay
On the S corp side, part of the profit becomes salary. The rest of the sum depends on that choice, so it has to be one the owner can defend.
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Work out the tax on the owner’s work
Self-employment tax on one side, payroll tax on the salary on the other. They fall on different amounts, so neither can be read straight across to the other.
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Add what the route costs to run
Payroll, bookkeeping, tax preparation and anything the state charges go in the column that actually pays them.
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Compare what is left
The gap after costs is the number to look at, and it moves with the income and the state.